Eugene Fama reiterates opposition to active management, high fees

Eugene Fama, a man widely regarded as the father of modern finance, held firm Monday to his staunch opposition to active management and high fees while in some ways dumbing down the concept of asset management. “Active management is a zero-sum game before cost, and the winners have to win at the expense of losers,” he told an audience of financial professionals at the Investment Management Consultants Association's Advanced Wealth Management Conference in Chicago. Asked where he thinks alternative investments belong in a portfolio strategy Mr. Fama first emphasized his distaste for any strategy that self-reports performance, then elaborated by saying that he can't understand why hedge funds are attracting assets. “I can't figure out why anyone invests in active management, so asking me about hedge funds is just an extreme version of the same question,” he told the audience. Although many of his responses during the hour-long question-and-answer session drew laughs from the audience, Mr. Fama wasn't joking in his candid criticism of what he views as bad investment decisions. “Since I think everything is appropriately priced, my advice would be to avoid high fees. So you can forget about hedge funds,” Mr. Fama said. Part of believing that everything is appropriately priced means less emphasis on balancing global allocations. “It doesn't matter that much,” Mr. Fama said of investing outside U.S. markets. “If I were to take the U.S. market and combine it with all other markets, the effect on return would be minimal,” he said. “The U.S. market is so well-diversified already that combining it with global markets doesn't really matter.” Mr. Fama dismissed market concerns about the beginning of tapering of the five-year quantitative-easing program as a non-issue that is getting way too much attention. Citing the strategy of buying short-term debt in order to finance the purchase of long-term debt, he said, “I don't think the Fed[eral Reserve] has any role in how high rates are right now.” “I don't understand why everyone is paying attention to this tapering,” Mr. Fama said. “The Fed is using one kind of bond to buy another kind of bond,” he said. “What's the big deal, and why is anyone taking the Fed seriously?”